December retail inflation at 18-month low of 2.19%

This is the fifth consecutive month that retail inflation is maintained below RBI's medium term target inflation supporting the central bank's decision to keep interest rates on hold.

ET Bureau|

Updated: Jan 14, 2019, 11.50 PM IST

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CPI inflation hits 18-month low, eases to 2.19% in December 2018

New Delhi: Wholesale and retail inflation eased further in December on the back of cooling food and fuel prices, raising the prospects of a reversal of policy stance at the next central bank meeting, or even that of rate cut to stimulate growth.

India’s headline inflation rate based on the consumer price index (combined) eased to an 18-month low of 2.19% in December, down from 2.33% in November and 5.21% in December 2017, according to official data released on Monday.

Wholesale inflation softened to an eight-month low of 3.8% in December from 4.64% in November, data released by industry department showed.

Retail inflation has stayed below the RBI’s medium-term target of 4% for the fifth straight month. It fell to its lowest level since June 2017 of 1.46%, raising prospects of a change in the reserve Bank of India’s monetary stance.

“This paves way for the MPC (Monetary Policy Committee) to not just change its stance to neutral but also mull over a possible rate cut,” said Shubhada Rao, chief economist at Yes Bank. “The inflation trajectory looks below 4% over the next quarter.”

The Reserve Bank had kept policy rates unchanged in the December review of the monetary policy but had changed its stance to “calibrated tightening”.

The next monetary policy review is due on February 7.

Industry has also stepped up demand for a rate cut. Confederation of Indian Industry (CII) in a statement said the decline in inflation should induce RBI to resume the accommodative policy stance to trigger the investment cycle and support growth by lowering the borrowing costs of industry.

Industrial growth had slowed to 0.5% in November, data released on Friday showed.

Crisil chief economist DK Joshi, however, ruled out a rate cut, citing high core inflation, but said a change in stance is possible.

Core inflation (excluding food, fuel and light, and transport and communications) was 5.7% in December. “Official data are giving somewhat conflicting signals,” Joshi said. “While GDP data shows a slowing economy, core inflation numbers imply demand side pressure. The key culprits of high core inflation are health and education where inflation is constantly on the rise due to limited supply.”

The first advance estimates of GDP released last week showed the economy expanding at 7.2% in FY19 with second-half growth at 6.8% against 7.6% in the first six months.

FOOD AND FUELCPI food price index fell 2.51% in December over last year, after contracting 2.61% in November. Retail inflation in health was 9.02% and that in education at 8.38%.

Decline in crude prices to $57.8/bbl in December from $65.4/bbl in November and rupee appreciation to Rs 70.72 against the US dollar from Rs 71.79 during the same period triggered a fall in retail inflation.

Fuel and light inflation fell to 4.54% from 7.39% in November while housing inflation stood at 5.32% last month against 5.99% in November.

“The food component due to farmers’ distress has brought down both retail and wholesale inflation, aided by lower crude,” said Madan Sabnavis, chief economist at CARE Ratings.

He expects CPI to remain less than 4% this year with likely risks emerging from firmer crude and food prices moving upwards as minimum support price becomes effective.

Rao of Yes Bank, too, expects retail inflation to be below 4% for the rest of the fiscal while Joshi of Crisil said, “Going ahead, food inflation might be a source of pressure with global food prices picking up and farmers’ distress.”